I wonder what the legal issues are for an American company having cross-border employees. How do they take care of national insurance and income taxes etc for their UK-based employee when (presumably) they have no legal presence there? How does this work for them?
Usually the individuals are not employees pr. Se, unless the company in question has a local legal presence in the country of the employee. Instead they are hired on a simple business contract containing similar terms as a standard employement contract. The employee then sends invoices for their salary. In theory this makes them contractors, but in practice they are employees.
The employee will however most often have a few extra things to take care of themselves, compared to being "employed by the books". For example to report local taxes, pension arrangements, health insurance etc. The company isn't usually involved in that, but might pay for it indirectly through a salary that's adjusted for these aspects.
In some countries, local laws require the employee / contractor to have a company (sole proprietor kind). In others, the contracts can be made directly between the business and the individual.
In the UK this is not legal. It's not even vaguely close to being outside IR35.
While I have no familiarity, I doubt it is legal in many other countries with a socialist state that requires employers to pay things like national insurance.
Basically if you walk like an employee, and talk like an employee, you're an employee and shouldn't pretend to be an independent contractor and you probably should not set up your own company as you'll be double hit with taxes if they catch you (company taxes for employees and standard employee taxes). That could leave you with several years worth of some serious taxes to back pay.
Don't want to be doom and gloom, but be aware what you're getting yourself into if you're going to pretend to be a consultant/contractor when you're not.
(Disclaimer: not a tax expert or an accountant, but I have spent too many hours researching this stuff as it applies to my own situation.)
IR35 only applies when there's an intermediary -- usually when you're providing services via a limited company, then taking dividends at the lower tax/NI rate instead of a salary.
If you're self-employed and contracting with a foreign company, then IR35 can't apply (or so I was told when I spoke to HMRC to ask precisely this question).
Now, HMRC could decide that it's not a true self-employment relation. In my case (self-employed, working remotely for a company in the US, limited degree of control by engager, purchasing my own equipment, bearing the risk of invoices not being paid) I think there are enough factors to make it a true self-employment relationship and HMRC's online questionnaire agrees.
Even if you were contracting through a limited company, if you met the self-employment test you'd probably meet the IR35 test when operating through a Ltd. I'd prefer not to risk it -- which is why I went the self-employment route.
There are some pretty good IR25 proof legal contracts out there. The key is to have a contract that defines your independence and that the way in which you operate with the client is very unlike that of an employee. Good examples are the ability to choose when and where you work, that you can work for other companies at the same time, and the fact that you use your own resources: http://www.contractoruk.com/contracts/wary_consultancy_contr...
Isn't IR35 used to cover cases where there is actual tax avoidance though? Where it is not a sole propriertorship, but rather a Ltd, and the owner is extracting his salary through NIC exempt dividends?
We do have UK presence now. :) I don't know how these things worked out with other people before that, but I can speak about myself.
I'm one of the community managers at SE and I work from my home in Canada where Stack Exchange does not (yet?) have an office. My arrangement is basically that I send in an invoice every month like any contractor would and it is up to me to take care of my own taxes and so on.
I work for Stack Exchange in Germany (where they have no presence except for me), and I'm a regular employee with all German taxes, social security etc. that entails. These things can be made to work.
How do they do this? I seem to be having a mental block as to the logistics of this. (On a side note, the pragmatics of having cross border employees when you have no presence in that country would be a very, very interesting blog post, and one I'd read with interest.)
From another comment I understand they also have a UK presence. Are you a true-blue employee or a contractor who takes care of their own taxes and affairs, and just issues monthly invoices? If you are an actual employee (in the legal sense), are you employed by the UK or US company, or something else? Do they have to have an address there, or a foreign subsidiary? Presumably there's no German legal entity, so how have they registered there to pay tax?
This is something I'm prospectively interested in doing for my own business, but I'm not sure how I'd make it work from a tax point of view.
I'm a regular employee (of the UK presence; it's all EU, so I assume that makes things a bit easier). There's a German tax office that does the wage accounting to make sure that it follows all the rules.
The only difference to a standard German employee is this: While in Germany legally the employee owes the wage taxes, they're usually collected by the employer and passed on to the authorities. But the German tax authorities don't like to do that with foreign companies (basically because they can't hunt after them when they don't pay). So from a legal perspective, I pay the wage taxes myself (but the tax office takes care of that as well).
I never knew that was possible! I'd have imagined it could have been possible as a contractor, but not with this arrangement. Is there any particular benefit to being an employee in this case as opposed to a contractor?
I may be wrong, but if they have a presence in the UK they most likely do not need a presence in Germany. Through EU agreements, Germans are allowed to work legally in the UK.
They are allowed to live, work, and study in the UK without any significant restriction, and the tax issue would be a non-issue if they were domiciled in the UK. The reason it's interesting and complicated is because they're apparently living and working in Germany as an employee, without FogCreek having a German entity. They wouldn't be subject to British taxes and there's no German business entity to register with the German tax office.
A UK company (or a company of any jurisdiction) can establish a subsidiary in another EU state, in much the same way you could register a NY-incorporated company as a foreign company in CA, but this doesn't appear to be what's happened in this case.
Nothing beats moving to a low-admin country, though. Since you're working remotely anyway, you could as well do that from Ecuador or so. The lower/non-existing tax bill will easily pay for any flights back home. Enjoy the beach!
How is moving to a country with a low tax rate bilking the government? For that matter, what government?
Also if you are an American citizen you have to pay taxes on your worldwide income even if you don't live in the US anymore. There are pretty good exemptions (I think its like the first 90K of income) but you still have to file every year.
